France and Germany drift over eurozone crisis

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Differences between France and Germany on solving the eurozone crisis are increasingly evident, with Paris pushing with more urgency than Berlin for banking reform and a Spanish bailout.

German Chancellor Angela Merkel and French President Francois Hollande will have an opportunity to try to narrow those differences when they meet in the southwestern German town of Ludwigsburg on Saturday.

The occasion is to mark the 50th anniversary of a speech by French post-war president Charles De Gaulle to German youth.

Although the meeting is largely ceremonial, officials say that Merkel and Hollande will discuss the possible merger of the British defence group BAE and European aerospace giant EADS, as well as common banking supervision.

With the German-French partnership the engine of European integration, disagreements between Berlin and Paris bode ill for a coherent response to the crisis.

Differences on the key issue of common banking supervision spilled out into the open after a meeting last weekend of finance ministers in Nicosia.

Germany's Wolfgang Schaeuble said it became immediately clear during a feisty debate that the target-date for adoption of January 1st, 2013, was no longer attainable.

"January 1st, that will not be possible," Schaeuble said, adding that it was "not even worth having that discussion."

His French counterpart Pierre Moscovici retorted that "losing time by not moving fast is a mistake."

In order to break a dangerous link between bank and sovereign debt, EU leaders decided in June to allow the EU's new ESM bailout fund to recapitalise banks directly instead of passing the loans through governments and adding to their debt loads.

But EU leaders linked this to shift to a common banking supervisor, with the goal of having this in place by the beginning of 2013.

However Germany and France differ on what common banking supervision should entail, although they both agree on handing the job to the European Central Bank.

Berlin believes the common supervisor should handle, especially to begin with, only big banks whose failure could have an impact across the eurozone, with national regulators to continue to monitor smaller lenders.

Paris however wants to the ECB be responsible for all the roughly 6,000 banks in the eurozone.

Differences on other key issues, such as a bailout for Spain, have also become apparent.

While in public Hollande has recognised that Spain has the right to decide for itself whether and when to ask for help from the EU and European Central Bank, in private French officials do not mince their words.

"It would be better if Spain demands help, everyone knows that it needs it," a senior French official said recently on condition on anonymity.

While not mentioning Spain directly, Moscovici said earlier this month that the ECB's new programme to help struggling eurozone states by buying up their bonds on the secondary market should be used.

At the beginning of September the ECB unveiled its new bond-buying programme, but to unlock help from the central bank eurozone states must first ask for an EU bailout programme, which has conditions attached and entails outside supervision.

But the announcement itself of the ECB programme helped reduce tensions in the government bond markets, reducing Spain's borrowing costs to some degree.

Spanish officials have indicated they would prefer to continue the current course of deficit reduction and structural reforms in the hope that their borrowing costs come down enough to avoid resorting to a bailout.

This is a strategy the German government supports.

"A rescue programme, that's heavy artillery, with conditions and the intervention of the troika" of the bailout lenders the EU, IMF and ECB, said a German official.

"That is not a step to be taken lightly, it is for countries that can no longer finance themselves on the markets," added the official, noting "that is not the case today" for Spain as it successfully placed long-term debt on Thursday.

A bailout for Spain would be politically inconvenient for Merkel's coalition, which is divided on the issue on bankrolling rescues for countries which have failed to manage their finances, and would need to seek parliamentary approval.

Germany faces a similar problem on Greece, struggling through a fifth year of recession and have already slashed spending, wants more time to implement additional cutbacks needed unlock €31.5 billion ($41 billion) in bailout loans.

France was one of the first countries to indicate that it was receptive to a Greek request to spread out the cuts, but the Germans are reluctant to risk a refusal by lawmakers.

Germans want to see that any delay accorded Greece, doesn't cost any additional money so it won't have to seek parliamentary approval, according to French officials.

However an IMF official said on Friday that any extension of the programme would require more funding and that it would be up the EU to find the cash.

German officials have repeatedly said that a resolution of the eurozone crisis will take time, but Hollande has called for decisions to be taken at an EU summit next month to help restore confidence and the prospects of growth.